January 2018 | Inclusive Economic Transformation Opportunities for Sustainable Development in Global Value Chains: A Case Study of the Myanmar Garment Sector Samah El-Shahat Violante di Canossa Country Case Study January 2018 l Inclusive Economic Transformation Opportunities for Sustainable Development in Global Value Chains: A Case Study of the Myanmar Garment Sector Samah El-Shahat China-i Ltd Violante di Canossa Independent Consultant Country Case Study ii Published by International Centre for Trade and Sustainable Development (ICTSD) International Environment House 2 7 Chemin de Balexert, 1219 Geneva, Switzerland Tel: +41 22 917 8492 Fax: +41 22 917 8093 [email protected] www.ictsd.org Publisher and Chief Executive: Ricardo Meléndez-Ortiz Managing Director: Deborah Vorhies Programme Manager: Judith Fessehaie Senior Programme Officer: Kiranne Guddoy Acknowledgements This paper was produced under ICTSD’s Programme on Inclusive Economic Transformation as part of a project focused on global value chains which is aimed at empowering least developed and low income countries to effectively utilise value chains to achieve sustainable and inclusive economic transformation. The authors wish to thank the ICTSD team involved in the conception and review of this paper as well as Mike Morris (PRISM, University of Cape Town) and Jacob Clere (SMART Myanmar) for their helpful comments on a previous draft of this paper. ICTSD is grateful for the generous support from its core donors including the UK Department for International Development (DFID); the Swedish International Development Cooperation Agency (SIDA); the Ministry of Foreign Affairs of Denmark (Danida); and the Netherlands Directorate- General of Development Cooperation (DGIS). ICTSD welcomes feedback on this publication. This can be sent to Judith Fessehaie ([email protected]) or Fabrice Lehmann, ICTSD Executive Editor ([email protected]). Citation: El-Shahat, Samah, and Violante Di Canossa. 2018. Opportunities for Sustainable Development in Global Value Chains: A Case Study of the Myanmar Garment Sector. Geneva: International Centre for Trade and Sustainable Development (ICTSD). Copyright © ICTSD, 2018. Readers are encouraged to quote and reproduce this material for educational and non-profit purposes, provided the source is acknowledged. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. To view a copy of this license, visit: https://creativecommons.org/licenses/by-nc-nd/4.0/ The views expressed in this publication are those of the authors and do not necessarily reflect the views of ICTSD or the funding institutions. ISSN 1995-6940 iii Inclusive Economic Transformation TABLE OF CONTENTS LIST OF FIGURES AND TABLES IV LIST OF ABBREVIATIONS V EXECUTIVE SUMMARY vi 1. INTRODUCTION 1 2. CONTEXTUALISING GARMENT GLOBAL VALUE CHAINS AND SUSTAINABLE DEVELOPMENT 3 3. MAPPING THE DEVELOPING DYNAMICS OF THE MYANMAR GARMENT GLOBAL VALUE CHAIN 6 3.1 Export Developments 6 3.2 Myanmar Garment Manufacturers 8 3.3 Cut-Make-Package: The Dominant Pricing Model 13 3.4 The Minimum Wage Law and Productivity 14 4. DIFFERENT UPGRADING OPPORTUNITIES 16 4.1 Economic Upgrading 16 4.2 Social Upgrading and Sustainable Development Goals 18 4.3 Opportunities to Upgrade 21 5. CHALLENGES TO UPGRADING 23 8. POLICY RECOMMENDATIONS 27 7. CONCLUSIONS 30 REFERENCES 32 ADDITIONAL BIBLIOGRAPHY 34 iv LIST OF FIGURES AND TABLES Figure 1: Minimum wage in main Asian garment manufacturers (monthly average, 2013/16, US$) Figure 2: Garment imports to the EU: knit versus woven products (2000–16, US$ million) Table 1: Myanmar garment main export destinations (1995 to 2016, US$ million) Table 2: Ownership, employment distribution, and end market destinations of the Myanmar garment sector (2017) Table 3: Locally owned factories’ export destinations (2017) v Inclusive Economic Transformation LIST OF ABBREVIATIONS AGOA African Growth and Opportunity Act BSCI Business Social Compliance Initiative CAFTA China–ASEAN Free Trade Area CBI Centre for the Promotion of Imports CMP cut-make-package CMT cut-make-and-trim EBA Everything But Arms EU European Union FDI foreign direct investment FOB free on board GSP Generalized System of Preferences GVC global value chain ILO International Labour Organization LDC least developed country MGMA Myanmar Garment Manufacturers Association NES National Export Strategy NGO non-governmental organisation OBM original brand manufacturing ODM original design manufacturing SDG Sustainable Development Goal SEZ special economic zone UK United Kingdom US United States WTO World Trade Organization vi EXECUTIVE SUMMARY It has been estimated that two thirds of global trade is driven by global value chain (GVC) production. The garment value chain has often been a driver of early export-led industrialisation for both developed and developing countries, requiring abundant cheap labour and relatively simple production technologies. The notion of Myanmar being the last economic frontier, abundant with natural resources and investment opportunities, now dominates the narrative on foreign trade. Indeed, in the last few years, together with Ethiopia, Myanmar has been singled out as the new kid on the block, the “new hot spot or rising star” among least developed countries (LDCs) entering the industrialisation process (Staritz at al. 2016). This paper analyses the garment value chain in Myanmar, with a focus on implications for sustainable development. The Myanmar garment sector has experienced a renaissance since sanctions were lifted in 2013. Foreign investors are driven by preferential market access to Western countries, such as the EU’s Everything But Arms scheme, access to low wage unskilled labour, and risk diversification against social and political risk in countries such as Bangladesh. In Myanmar, the industry is not only contributing to the country’s transition from a centrally directed economy to a market-oriented one, but it is also underwriting poverty alleviation and employment creation for young uneducated women, as well as generating significant export earnings for the country. Myanmar’s garment exports increased from US$340 million in 2010 to around US$1.6 billion in 2016, with 420 firms members of the Myanmar Garment Manufacturers Association (MGMA) in early 2017. The European Union (EU) is the largest (and fastest growing) export market, followed by Japan and South Korea. The government wants to tap into these opportunities to diversify an economy heavily concentrated on agriculture and extractive resources. It is relying heavily on foreign direct investment (FDI) to achieve “inclusive growth” via industrialisation. The government has earmarked the garment sector as an important engine of growth as part of its 2015 five-year National Export Strategy (NES). The NES provides Myanmar with a detailed framework and decision-making instrument to guide the country’s trade development and boost its export competitiveness, so as to create “sustainable export-led growth and prosperity for an emerging Myanmar.” However, implementation has been partial and results over the brief period to date have been mixed. Among other factors, the insufficient capacity and capabilities of the government itself have been often pointed out as an obstacle in the innovation process by our interviewees. Uncertainty and instability are still main concerns for foreign investors. We also believe that Myanmar’s potential lies in its nascent industrialisation and diversification, particularly in terms of absorbing information and inputs on sustainable investment and social upgrading. There is a huge appetite in the country for adopting change and for ameliorating factory conditions. There is also an opportunity for gender issues and female empowerment to become part of the sector’s competitive advantage. On the other hand, the nascent stage of Myanmar garment industry is evident in the many difficulties of doing business in the country, such as an immature legal system, both in terms of comprehensive legislation and on-the-ground enforcement, poor hard and soft infrastructure, and lack of supporting functions, all causing long lead times. The sector works on a cut-make-package (CMP) pricing model, i.e. the primary stage within the value chain. The CMP pricing model implies that Myanmar accrues very little value added vii Inclusive Economic Transformation and economic rents,1 and develops very little upgrading capabilities. This is not only the result of deficiencies in the local operating environment, but also of the strategies of transnational actors, acting as coordinators between lead firms and Myanmar manufacturers, limiting transfer of knowledge and upgrading opportunities. As in the typical “triangular manufacturing” production process, the relationship between Myanmar manufacturers and international buyers is usually managed by transnational agents— mostly of Asian origin, and only rarely through retailers’ head–office buying teams liaising directly with the factories. The agent often manages the relationship with the input supplier too. This makes the former a very powerful player in the market as both factories and brands are reliant on them for orders. There are some exceptions to CMP, though. Some exporting firms, usually large companies, either wholly foreign-owned or operating through joint ventures with branches outside of Myanmar, are de facto pursuing a free on board (FOB) production modality, albeit, for tax reasons, they are registered as CMP with the